U.K. Banks Sell Assets to Plug Capital Hole Before Report

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, had a core Tier 1 ratio of 7.7 percent at the end of December, the worst among the U.K. banks and less than the 8.5 percent minimum required under Basel III. Photographer: Chris Ratcliffe/Bloomberg

March 14 (Bloomberg) -- U.K. lenders including Royal Bank
of Scotland Group Plc and Lloyds Banking Group Plc are selling
assets and detailing plans to bolster their balance sheets to
deflect calls from regulators to plug a capital shortfall.

Lloyds this week sold a stake in asset manager St. James’s
Place Plc, booking a 400 million-pound ($597 million) gain,
while RBS said last month it will sell its U.S. operation and
shrink its securities unit to bolster capital. Barclays Plc
plans to sell contingent convertible notes to boost its
financial strength, a person with knowledge of the matter said
last month.

The Bank of England’s Financial Policy Committee, which
oversees the stability of the lending system, said in November
banks may have a capital shortfall of as much as 60 billion
pounds because they haven’t recognized future losses on bad
loans or made adequate provision for compensating customers
wrongly sold products such as payment-protection insurance. The
committee will meet on March 19 before publishing a statement on
March 27.

“There seems to be a lot of smoke around this which
suggests there’s a fire,” said Christopher Wheeler, a London-based financials analyst at Mediobanca SpA. “Banks are doing
everything they can to get a solid capital position.”

HSBC Holdings Plc and Standard Chartered Plc, the two
British banks that get most of their profit from Asia, have the
strongest core Tier 1 capital ratios under the Basel Committee
on Banking Supervision’s latest rules on capital, known as Basel
III. HSBC’s ratio, at 9.8 percent, exceeds the 9.5 percent
minimum the bank will have to hold. Standard Chartered’s ratio
stands at 10.7 percent, meeting its 8 percent threshold.

RBS Lags

Meanwhile, RBS, Britain’s biggest government-owned bank,
had a core Tier 1 ratio of 7.7 percent at the end of December,
the worst among the U.K. banks and less than the 8.5 percent
minimum required under Basel III. Lloyds, the country’s largest
mortgage lender, has a ratio of 8.1 percent, more than the 7
percent it will have to hold. Barclays has a ratio of 8.2
percent, less than the 9 percent minimum.

“The rankings have been clear: Barclays, Lloyds and RBS
have tended to be at the weaker end of Basel III,” said Sandy
Chen, an analyst at Cenkos Securities Plc in London. “HSBC and
Standard Chartered have been at the stronger end.”

The central bank said in November it was concerned lenders
haven’t fully recognized future loan losses and may be using
inappropriate risk models to assess how much capital they hold.
Under the Basel rules, firms use so-called risk-weightings to
decide how much capital to hold based on an assessment of how
likely assets are to default and the riskiness of
counterparties.

Growth Threat

At the same time, banks are under pressure from both
government and regulators not to bolster capital by cutting back
lending and choking economic growth.

Following pressure from the government and the FSA, RBS
last month shifted strategy and said it would sell a 25 percent
stake in Citizens Financial Group Inc., the U.S. consumer and
commercial lender acquired in 1988, in two years. Chief
Executive Officer Stephen Hester had said in August the bank,
which is 81 percent government owned, would retain Citizens
because it was a “core” part of the company.

“We did reach an important accommodation in recent days
with the government, our majority shareholder, and the
regulators in relation to their well-publicized concerns across
the industry on capital,” Hester said on Feb. 28. “The two
revisions to our strategy that go with that are a further
shrinkage of our markets business, with the capital there coming
down significantly further over the next couple of years” and
the intention to start selling Citizens, Hester added. The
lender plans to bolster its capital ratio to 9 percent this
year.

Government Injection

Andrew Bailey, the U.K.’s chief banking supervisor, told
lawmakers in London yesterday that he hasn’t asked the
government to inject additional money into RBS. He will lead the
Prudential Regulation Authority when it starts operations next
month.

RBS said yesterday’s sale of a 507 million-pound stake in
Direct Line Insurance Group Plc, the U.K.’s biggest home and
motor insurer, was prompted by European Union state-aid rules,
rather than capital needs. EU regulators ordered the bank to
sell the insurer after RBS received a 45.5 billion-pound
government rescue in 2008 and 2009, the biggest bank bailout in
the world. The Direct Line shares were sold for less than their
book value.

Lloyds Sale

Lloyds said the sale of the 20 percent stake in St. James’s
Place will increase its core Tier 1 ratio by 15 basis points, or
500 million pounds. Selling its remaining 37 percent stake in
the asset manager at about the same price could add an extra 30
basis points to the capital gage, Citigroup analysts including
Andrew Coombs wrote in a note to clients on March 11.

“The well-timed partial disposal of Lloyds’ stake in St.
James’s Place” is “likely to be seen as politically astute
ahead of next week’s FPC meeting,” said Ian Gordon, a banking
analyst at Investec Plc in London. “Lloyds may be successful in
heading off the unpalatable potential for a fresh regulatory
assault and/or any further equity issue.”

Lloyds CEO Antonio Horta-Osorio said earlier this month the
bank had boosted its core Tier 1 ratio by 1 percentage point in
2012 and remained “confident” in the firm’s capital position
as the it shrinks its balance sheet.

Barclays Co-Cos

Barclays, Britain’s second-largest bank by assets, is
planning on selling contingent convertible notes to bolster its
balance sheet, a person with knowledge of the matter said last
month. The bank may sell as much as 7 billion pounds of the
securities, which become shares if its core Tier 1 equity ratio
drops below a set level. In November, the firm issued $3 billion
of contingent capital notes.

Barclays is targeting a core Tier 1 ratio of 10.5 percent,
1.5 percentage points more than the minimum required by Basel
III, Benoit de Vitry, Barclays’s group treasurer, told analysts
on a Feb. 13 conference call.

“The heavy lifting has been done and set in motion,” said
Chirantan Barua, an analyst at Bernstein Research in London.

That’s allowing Barclays and HSBC to return capital to
shareholders. Barclays raised its fourth-quarter dividend to 3.5
pence a share from 3 pence in the year-earlier period. HSBC said
it would increase its fourth-quarter dividend to 18 cents from
14 cents. Both government-owned Lloyds and RBS have not paid
dividends since the crisis.

“We are already really well placed,” HSBC CEO Stuart
Gulliver told analysts on March 4. After selling or closing more
than 47 operations since he took the top job in 2011, he said he
may exit more businesses this year to raise the lender’s capital
ratio by 50 basis points to 10.3 percent.

HSBC may be in the strongest position among the banks with
British operations, Bernstein’s Barua said. RBS and Lloyds “are
restructuring and not generating great amounts of cash,” Barua
said. “In a couple of years, HSBC will not know what do with
the tons of cash it’s generating.”